Singapore Post S08
Price target:
UOB Kay Hian ‘hold’ 46 cents
Nationalisation of postal segment unlikely
UOB Kay Hian is keeping its “hold” recommendation on Singapore Post (SingPost) with an unchanged target price of 46 cents.
This comes on the back of a recent parliamentary hearing in early July when it was mentioned that the government would consider allowing SingPost to introduce postage rate adjustments in response to declining domestic letters and mail volumes. Excluding a small 1%–3% increase in January, postage rates have been kept constant since 2014.
This announcement was made after the group initiated a strategic review of its domestic postal business amid a global secular decline in traditional letters and mail volumes coupled with its post and parcel segment posting its first-ever annual operating loss of $15.9 million in FY2023 ended March.
“As discussions are still ongoing between Singapore’s postal regulator Infocomm Media Development Authority (IMDA) and SingPost, we opine that the postal rate adjustments would likely occur in 3QFY2024/4QFY2024,” says analyst Llelleythan Tan in his July 11 report.
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“With expected postal rate adjustments, we now reckon that the domestic postal and parcel (DPP) segment is nearing a bottom. Based on our FY2024 estimates, assuming constant delivery volumes, we estimate that SingPost would have to raise basic and tracked postal rates by 1–2 cents (3%–5%) and 5–6 cents (2%–3%) respectively to break even,” says Tan.
The analyst estimates an operating loss for DPP in FY2024 of between $12 million and $15 million. Although postal rate hikes may bring in additional revenue, this may instead hasten mailing volume decline as mail users cut down on mailing costs. As postal rates are regulated by the government, Tan reckons that the group may not be able to increase basic postal rates instantly by about 30% in line with global peers but instead implement gradual 5%–8% rate increases.
“Assuming postal rate adjustments are insufficient, we expect changes to service standards as the next step to reduce operating costs,” says Tan.
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Assuming relaxation of service standards and regulatory approval, Tan opines that the group may outsource the delivery of letters and mail to third-party logistical companies while it solely operates the sorting segment, leading to better margins for the DPP segment.
If all else fails, a nationalisation of SingPost’s letters and mail business is possible. However, given that the Singapore government only fully liberalised the postal market in 2007, the nationalisation of SingPost’s letters and mail would likely be a last resort without first exhausting all available options. Furthermore, SingPost uses the same postal network for its domestic e-commerce segment, making it unlikely that the group would divest its letters and mail postal business and infrastructure. — Samantha Chiew
Grand Venture Technology JLB
Price target:
CGS-CIMB Research ‘hold’ 51 cents
Lowered forecasts amid muted customer demand
CGS-CIMB Research analyst William Tng has retained his “hold” call on Grand Venture Technology (GVT) with a lower target price of 51 cents from 54 cents previously. Tng’s report dated July 11 comes ahead of GVT’s results for the 1HFY2023 ended June 31. GVT is expected to release its results before Aug 10.
To Tng, the company’s revenue is likely to have declined 11.9% y-o-y and 7.7% h-o-h to $59.1 million for the six-month period. At the same time, the analyst estimates that GVT’s net profit may come in at $3.5 million, down 50.9% and 43.5% on a y-o-y and h-o-h basis. The lower figures are likely to be due to “muted customer demand”.
“We estimate revenue declined 6.9% y-o-y but improved 19.7% q-o-q to $32.2 million in 2QFY2023 while net profit fell 43.2% y-o-y but improved 31.6% q-o-q to $2 million in 2QFY2023 as the second quarter has historically been a better quarter,” Tng writes.
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Tng has lowered his forecasts for FY2023 to FY2025 after estimates by Gartner and World Semiconductor Trade Statistics (WSTS) show global semiconductor sales are expected to fall by 11.2% and 10.3% in April and May.
He has lowered his revenue estimates for the period by 2.7% to 4.4% on the back of weak business sentiment arising from geopolitical and trade conflicts, bringing about risks of inflation concerns and a global recession.
Accordingly, Tng’s lowered revenue forecast also lowers his net profit forecasts for FY2023 to FY2025 by 8.3% to 12.6%.
“We also pare down FY2023 gross profit margin estimate by 0.7 percentage points due to ongoing first article costs for potential new customers,” he writes.
Meanwhile, all is not lost, with GVT revealing that it had acquired new customers across metrology, inspection, etch and wafer deposition in the semiconductor production chain at its annual general meeting (AGM) on April 27.
To Tng, the acquisitions mean that the company could see higher revenue potential in the front-end semiconductor business.
“GVT also highlighted that as at end-2022, the front-end semicon market size by revenue was US$94.8 billion ($126.85 billion) versus US$13.7 billion for the back end; this led to its decision to invest and penetrate the front-end semiconductor business,” he notes.
Downside risks, according to the analyst, include a “severe drop in customer orders” on the back of a global recession, as well as higher-than-expected spending for long-term growth.
Meanwhile, potential new customer wins with significant purchase orders and accretive M&As that could raise GVT’s revenue for FY2023 to FY2024 are upside risks. — Felicia Tan
Wilmar International F34
Price targets:
DBS Group Research ‘buy’ $5.30
Maybank Securities ‘hold’ $3.99
Downside risks ahead
Analysts from DBS Group Research and Maybank Securities have lowered their target prices for Wilmar International as they see soft services demand from China and low crude palm oil (CPO) prices as downside risks ahead of the group’s 2QFY2023 results. Wilmar will release its financial report for the 2QFY2023 and 1HFY2023 ending June 30 on Aug 11.
Maybank’s Thilan Wickramasinghe expects the group’s net profit after tax (NPAT) momentum to decelerate further in its 2QFY2023 results, noting that the weak demand from China could “likely drive downside risks” to its wholesale food segment.
In June, the Caixin China services purchasing managers index (PMI) was the weakest since January, indicating the country’s economic recovery is slowing. The weak figures indicate that consumers are cutting back on services such as restaurants, which will negatively affect Wilmar’s bulk food products segment in the 2QFY2023.
Falling palm oil prices, which was a key driver for Wilmar’s earnings from FY2021 to FY2022, may also affect the margins of Wilmar’s plantation segment on a q-o-q basis.
The analyst has previously kept his “hold” call on the counter while lowering his target price to $3.99 from $4.27. His target price is a higher weighted average cost of capital (WACC) of 5.6%, 1% terminal growth and a target P/E of 26 times.
“Wilmar trades to its China and India listings at a forward-P/E discount of 78% and 83%, respectively. However, we do not see a catalyst for this gap to close in the medium term given the ability of investors to directly participate in [the growth of China and India] through its listed subsidiaries,” he writes in his July 7 report.
“A continued weaker growth outlook in China coupled with seasonal production peaks for palm oil (which could weaken prices further), should limit room for positive earnings momentum in FY2023, in our view,” he adds.
DBS’s William Simadiputra, on the other hand, has kept his “buy” call as he sees Wilmar recovering from its 1HFY2023 low on improving palm oil refining margins and stronger performance from Yihai Kerry Arawana starting 2HFY2023.
“Despite the short-term earnings weakness, Wilmar’s integrated food products platform has room to further expand via its downstream division spanning consumer products to the central kitchen. The downstream expansion has strong synergies with its regional upstream and midstream platform. Wilmar plans to build 20 central kitchens in China in the next five to six years,” he writes in his July 10 report.
Simadiputra also expects Wilmar’s earnings to improve to US$2 billion ($2.69 billion) or up 23% y-o-y in FY2024 on further recovery of its tropical oil refining margin. “We believe Wilmar will be able to capitalise on the recovering edible oil market next year, driven by China edible oils demand recovery and supply disruption from El Nino,” he says.
The earnings expansion should also lift Wilmar’s current share price, which “doesn’t value” the group’s developing integrated food products platform, especially its downstream branded products and central kitchen expansion. With its share price close to Covid-19 levels, the analyst believes any temporary earnings weakness in FY2023 is “already priced in”.
However, Simadiputra has lowered its target price on Wilmar to $5.30 from $6.67 on lower earnings projections and multiple assumptions on its P/E for its earnings (sans China), which consists mostly of the tropical oil refining business.
“Our target price implies FY2024 P/E of 12x to account for earnings recovery prospects in FY2024. Furthermore, we also like Wilmar’s journey to downstream business that is set to create a more stable earnings platform ahead,” he says.
He warns that if Wilmar fails to capitalise on the recent low commodity prices, input costs may remain under pressure for food products and may cap the group’s share price performance. — Felicia Tan
DFI Retail Group D01
Price target:
RHB Bank Singapore ‘neutral’ US$3.09
Waiting for better outlook
Alfie Yeo of RHB is keeping his “neutral” rating on DFI Retail Group while waiting for the current “mixed” outlook to improve.
“China tourists to Hong Kong are still lagging pre-Covid levels and grocery consumption in Singapore, China and Hong Kong remains unexciting for DFI,” writes Yeo in his July 11 note.
“We stay cautious on a more aggressive recovery until DFI’s key markets’ domestic supermarket consumption and China outbound tourist numbers pick up.”
Yeo notes that while DFI had enjoyed better performance from its health and beauty and convenience store operations, the grocery and home-furnishing segments remain “relatively poor”.
He points out that just 2.8 million mainland Chinese visited Hong Kong in May, far below the pre-pandemic levels of between four and five million a month.
In Singapore, Yeo warns there is a risk of “downtrading” from higher-end grocery segments because of a less rosy outlook for the broader economy. This is because DFI’s Cold Storage supermarket chain in the city-state is seen as more upmarket versus those perceived as more mass market, namely, those operated by the Sheng Siong Group.
“We anticipate a gradual rather than firm earnings recovery towards 2019’s levels,” says Yeo, who has kept a target price of US$3.09 ($5.23) on the stock.
DFI recently announced that Scott Price, formerly WalMart’s Asia CEO, is taking over the CEO role from Ian Macleod from Aug 1 onwards.
“We believe there will be tweaks to DFI’s business focus and strategy after the new CEO’s appointment and the benefits of the new plans could take time to realise,” says Yeo. — The Edge Singapore
Nanofilm Technologies International MZH
Price targets:
CGS-CIMB Research ‘reduce’ $1.13
DBS Group Research ‘fully valued’ $1
UOB Kay Hian ‘sell’ $1.11
Share price drop following profit warning
Shares of Nanofilm Technologies International dropped by more than 10% to a near all-time low following its warning on July 10 that it will report a net loss of around $8 million for its 1HFY2023 ending June.
Citing unfavourable market conditions and significant investments required for new operations, the company has also guided for a one-third drop in revenue.
In addition, Nanofilm has deferred its earlier stated earnings and revenue target of $100 million and $500 million respectively come FY2025.
Nonetheless, the company expects to remain profitable for the whole of FY2023.
In his report on July 11, CGS-CIMB Research analyst William Tng reiterates his “reduce” call on the stock as the 1HFY2023 net loss was something he had already flagged in his earlier report on June 21.
The unchanged target price of $1.13 is still based on estimated FY2024 earnings of 14.3x, which is the average of its global and regional peers.
Upside risks include new order wins from customers as well as faster operational progress at its joint ventures ApexTech and Sydrogen Energy in FY2024 leading to higher net profit contributions, and strong demand upturn from customers, says Tng.
“Potential de-rating catalysts are high customer concentration, and higher operating costs as it expands into other countries and new businesses,” he adds.
In its separate note, DBS Group Research has similarly maintained its “fully valued” call, along with an unchanged $1 target price on the stock.
DBS notes that while 2HFY2023 recovery is intact, order momentum is slower than anticipated as demand for consumer electronics is still fragile.
Just last month, DBS has already cut its earnings forecasts by a 58%, projecting the company to report earnings of just $20.6 million for FY2023, down 53% over FY2021.
“Despite the deferment of the 2025 guidance, the group remains committed to the various strategic initiatives put in place, including the entry into the energy segment (hydrogen fuel cell, advanced EV battery, and solar cell) and expansion into Vietnam with a mega site similar in size to its China facilities, to drive growth ahead,” adds DBS.
In his July 11 note, UOB Kay Hian’s John Cheong downgraded his call to “sell” and slashed his target price from $1.61 to $1.11.
Following the guidance given by Nanofilm, Cheong has reduced his FY2023, FY2024 and FY2025 earnings estimates by 35%, 31% and 32% respectively.
His current target price of $1.11 is based on 18x FY2024 earnings, pegged to –1 s.d. (standard deviation) of its long-term forward mean to reflect the challenging environment it is facing.
Potential catalysts might come from a better-than-expected ramp-up of the nanofabrication business as well as new applications in the advanced material segment such as electric vehicles, bipolar plate electrodes in fuel cells and solar energy. — The Edge Singapore
